What Do You Do With Your Cash Savings?

There are many reasons to hold some amount of cash, and not put 100% of it into other investments. Emergency funds, and savings for near future purchases are examples.

Cash savings is one area where the rate that you earn makes all the difference. The products offered are for the most part very similar, so it really does pay to find the best rate of return possible.

My personal preference is for high interest savings accounts. For short term cash holdings, it's hard to beat their liquidity, principle protection, and CDIC coverage.

Let's consider some of the other options:

• Keeping it in your chequing or savings account at your bank: While letting cash sit in your account after your pay cheque is deposited may be the easiest option, and probably as safe as a high interest savings account (assuming you can resist the urge to spend it), moving money to a high interest savings account really only takes a few minutes on the internet, or over the phone. You'll earn many times more interest (in the range of 2 to 3 times more over a traditional big bank savings account) for your few minutes of work. Remember, the premium you earn over these accounts are guaranteed earnings. It's free money for a small amount of extra work.
  
• Money market mutual funds: This is a possible option, but it is not as liquid as a high interest savings account, and earns very close to what a high interest savings account would earn. If you choose this route, check for loads on the fund (you definitely want a no load fund for short term savings), and check for short term redemption penalties. Many funds also have minimum initial investment restrictions.
• Money market ETFs: For short term savings, the commissions you pay on a money market ETF will kill your return.

So if I've convinced you to use a high interest savings account, which one do you choose? Although advertising is a great way to get introduced to a product (ING Direct, for example), you really owe it to yourself to find out about as many other competitors as you can. Luckily, Peter has a great web site for comparing the rates offered for some of the leading institutions. Check out his site, especially the handy comparison chart.

Aside from picking the highest interest rate, you want to also check out the history of that bank's relative rate versus the competition, in case you're just catching one that has adjusted its rate. You also want to consider how convenient it is to move money back and forth between it and your regular chequing account. Do you have to send cheques? Or can you do it over the internet? Finally, make sure you check for any fees they may charge.

If you decide to open a TFSA account at one of these institutions, also note that some banks are offering a different TFSA rate than their non-registered accounts.

I realize that opening a new account can be a hassle, but consider that once your account is open, you can use it for the rest of your life (or the life of the institution). If you can earn a guaranteed one or two percent more on your short term savings for the rest of your life, I think it's well worth the time you put in now to get that account opened.

So, what do you do with your cash savings?